Preparing for cyclical change
Philip Saunders of Investec Asset Management
May 12, 2017
The world is changing and investors will need to make significant changes to the portfolios to exploit those changes, said Philip Saunders of Investec Asset Management.
While consensus has been about secular stagnation and low growth, there has been significant change in underlying cyclical conditions. “In 2017, barring any significant shock, we should see synchronized global growth,” predicted Philip Saunders, co-head of multi-asset growth at Investec Asset Management.
The evidence is mounting. And market data across regions shows that since July 2016, there has been a significant rotation away from interest rate-sensitive and defensive equities towards more cyclical exposure.
Commodity prices started to bottom-out late last year, although oil prices remained a lagging indicator. Investor sentiment on commodities and metals was still highly negative back then but as history frequently shows, that is often associated with a turning point.
“Gold mining stocks, which took off in remarkable fashion as we entered this year, was the first indicator that cyclical change was underway,” said Saunders.
There is also now growing debate about the continuation of ultra-easy monetary policies, which, while much needed in the aftermath of the global financial crisis, seems to have reached its limits.
One indication of that is Japan moving away from QE to QQE – focusing on the yield curve. That is because too much easing has contributed to asset price bubbles, capital misallocation and depressed productivity growth. “Asset price inflation has also had social, economic and political impact, most visibly in the rise of populism around the world,” he said.
In addition, the typical indicators suggest the risk of recession is receding. It’s a similar story in China, where the narrative has been all about a potential hard landing and the use of excessive debt to create growth. But the truth is, economic picture has improved and it has an impact from a cyclical perspective.
Yet investors have failed to pay attention to these significant changes. “In financial markets, we seems to be misdirected, obsessing over things that are not important,” said Saunders.
So what are the implications of a Trump presidency? “We have a pro-growth president and Republicans controlling both houses, which is typically good for markets. Unlike politicians, Trump is also a businessman, which means he can get things done. But what he gets done, we still have to wait and see.”
Currently, markets have been too heavily and unusually influenced by macro factors. But it is beginning to change and it will only be a matter of time before the cyclical growth trend gathers momentum.
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All information is as at November 2016 unless otherwise stated. This communication is provided for general information only. It is not intended to be relied upon as a forecast, research or investment advice, and is not an invitation to make an investment nor does it constitute an offer for sale. Any opinions stated are honestly held but are not guaranteed and should not be relied upon. All data, opinions, estimates and other information are provided as of the date of this document and may be subject to change without notice. Past performance figures shown and any forecasts are not indicative of future performance. Investment involves risks. In Hong Kong, this document is issued by Investec Asset Management Hong Kong Limited and has not been reviewed by the Securities and Futures Commission (SFC).In Singapore, this document is issued by Investec Asset Management Singapore Pte Limited (company registration number: 201220398M).
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